By Beau Eckstein

October 8, 2022

Borrower Equity, sba 504

In this article, you will learn the benefits and drawbacks of SBA 504 loans.


What is an SBA 504 loan?

An SBA 504 loan is a government-backed loan program designed to help small businesses grow and expand. The loans are provided by private lenders and backed by the Small Business Administration (SBA). The program offers low interest rates and long repayment terms, making it an attractive option for small businesses.

You can read more about the SBA Loan Program here and here.

The SBA 504 loan program is one of the most popular government-backed lending programs for small businesses. The loans are available for a variety of purposes, including the purchase of building, equipment, and real estate. The terms of the loans are very favorable, with low interest rates and long repayment terms.

It’s important to note that SBA 504 loans cannot be used for working capital or inventory or for consolidating, repaying or refinancing debt. They also cannot be used to purchase speculation or investment in rental real estate. An SBA 7a would be a better loan to apply for if one of these uses is what you have in mind.

The SBA 504 loan program is an excellent option for small businesses looking to expand or grow. The loans are readily available and offer very favorable terms.

What are the benefits of an SBA 504 loan?

The SBA 504 loan program is a government-backed loan program that provides small businesses with long-term, fixed-rate financing for major capital investments.

The benefits of an SBA 504 loan include:

1. Long-term financing: SBA 504 loans have a maximum term of 20 years, which helps businesses keep their monthly payments low. In some cases, terms are up to 25 years.

2. Fixed interest rates: With an SBA 504 loan, businesses can lock in a low interest rate for the life of the loan. This protects businesses from rising interest rates and makes budgeting easier.

NOTE: This fixed rate is for the full term of the CDC-portion of the total loan package.

3. Low down payment: The SBA 504 program requires a down payment of just 10% of the total project cost. This makes it easier for businesses to get the financing they need to make major capital investments. The industry lingo for this down payment is an “equity injection.”

What are the drawbacks of an SBA 504 loan?

In recent years, the SBA 504 loan program has become increasingly popular among small business owners. However, there are some drawbacks to this type of loan that potential borrowers should be aware of.

One of the main disadvantages of an SBA 504 loan is that they can be difficult to qualify for. In order to be eligible, businesses must have a net worth of less than $15 million and average after-tax profits of less than $5 million over the previous two years. Additionally, the business must occupy at least 51% of the property that is being purchased with the loan.

Another downside to SBA 504 loans is that the fixed loan for a twenty-year period can work against you, especially in an interest rate environment being seen in 2022 (rates are rising). At some point, rates will fall and you will be faced with either continuing to pay a higher rate or look for a refinancing option.

Who is eligible for an SBA 504 loan?

The SBA 504 loan program is available to small businesses that meet certain eligibility requirements. To be eligible, a business must have a net worth of less than $15 million and average annual profits of less than $5 million. The business must also be located in an eligible rural or urban area.

To apply for an SBA 504 loan, businesses must submit an application to the SBA-approved lender of their choice. The lender will then review the application and determine whether the business meets the eligibility requirements. If the business is approved, the lenders will provide funding for up to 90% of the project costs.

Remember, an SBA 504 loan is a package, where a bank supplies 50 percent of the total funds, a CDC arranges another 40 percent of the loan, and the borrower comes in with 10 percent. It is on this 40 percent CDC-arranged part of the SBA 504 loan that we’re talking about here. This is also the portion of the loan that is guaranteed by the SBA.

How do you apply for an SBA 504 loan?

The SBA 504 loan program is one of the most popular financing options for small businesses. Here's everything you need to know about how to apply for an SBA 504 loan.

The first step in applying for an SBA 504 loan is to contact a participating lender. There are a number of lenders who participate in the program, so it's important to shop around and compare rates and terms.

Once you've found a participating lender, you'll need to complete an application and provide financial documentation such as tax returns, business licenses, and financial statements.

Once your application is approved, the lender will work with you to determine the best way to structure your loan. The terms of an SBA 504 loan are typically 10 years and 25 years.

In conclusion,the SBA 504 loan is a great option for small business owners that are looking to expand or improve their business. The low down payment and long-term financing can be a great help to businesses that may not have the upfront capital to make these improvements. However, there are some drawbacks to this loan program. 

You need to weigh the benefits and drawbacks of SBA 504 loans to determine if they are a good fit for your financing needs.

Of course, we recommend you reach out to one of our experienced commercial loan advisors.

Working with Beau Eckstein as your commercial mortgage advisor when trying to locate the best SBA financing can be beneficial because he has extensive experience and knowledge in the field. He can help navigate the complex process of obtaining SBA financing and assist in finding the best options for your specific situation.

Additionally, his established relationships with lenders can help increase the chances of getting approved for funding.

Overall, working with a knowledgeable and experienced advisor like Beau Eckstein can greatly increase the chances of successfully obtaining SBA financing.

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